Dubai’s Nakheel Sukuk Cut to Sell at Exotix on Payment Risk

Nakheel PJSC’s Islamic bonds, which rallied 37 percent last year, were cut to sell by Exotix Ltd., which said the Dubai-based developer’s debt no longer accurately priced in the risk of a default.

It’s “highly unlikely” that Nakheel will manage to pay the principal on the notes, which mature in 2016, from its own capital, Exotix said in an e-mailed note today. The developer, which drove Dubai to the brink of default just over three years ago, may fall 70 percent short of funds required to settle $3 billion of sukuk and bank debt maturing that year, it said.

The yield on Nakheel’s Shariah-compliant notes dropped 904 basis points, or 9.04 percentage points, in 2012 as the state- run developer resumed projects it put on hold during Dubai’s real estate crash. Investors have purchased the debt “on conviction that it’s backed by the Dubai government,” Exotix said. Nakheel received a bailout from the government in December 2009 to settle a sukuk.

“We think the market is overestimating Dubai’s ability and willingness to repay this obligation as we move closer to maturity,” Exotix said. “The 2016 sukuk falls due at a precarious time when several other competing obligations might also require support.”

Some $7.5 billion of Dubai-related restructured debt is due in 2015 and the first half of 2016, before Nakheel’s bonds mature in August that year, Exotix said. The bonds were trading at 105.61 cents to the dollar at 6:30 p.m. in Dubai, up from 77.64 cents a year ago, data compiled by Bloomberg show.

Limited Cash

Nakheel said in November it sold 419 million dirhams ($114 million) of land plots at projects including the Palm Jumeirah, an artificial island shaped like a palm tree leaf and visible from space. Last month it awarded construction contracts valued at more than 500 million dirhams to build villas at its Jumeirah Park development.

While Dubai’s real estate market “is recovering,” Nakheel may not produce more than $700 million to $800 million in cumulative internal cash by 2016, Exotix said.

The United Arab Emirates central bank’s caps on mortgage loans are “very strict,” Exotix said, referring to a proposal from the regulator to limit the amount of home loans expatriates can get from local banks for their first home purchase to 50 percent of the unit’s value.

If enacted, the limits are “likely to have a damaging impact on Nakheel’s business model, which is heavily reliant on land and villa/condominium sales,” Exotix said.

To contact the reporter on this story: Sherine El Madany in Dubai at

To contact the editor responsible for this story: Alaa Shahine at

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